Companies find it pays to be good

The details have yet to be sorted out, but the intention is already clear. It will send a signal to investors that investing ethically will not hurt their pockets.

Times have changed since business ethics tended to be referred to only in books by Greek philosophers or were an afterthought for corporate barons once they had made their pile, retired and looked to settle accounts with both their conscience and their maker.

Ethics have now become an issue where all and sundry – governments, MEPs, businesses and investors – have their sights firmly set on the moral high ground.

“Ethics used to be for philanthropists. Now they are everywhere,” says Alison Bowen, of UK-based Business in the Community, a forum which aims to make industry more socially responsible, for instance by supporting projects in deprived inner cities.

For the unit trust company behind the new European index, NPI Asset Management, it is the logical follow-up to a British initiative tracking 150 socially responsible companies, unveiled in the UK earlier this month. The sectoral weighting of companies is based on the FT index.

NPI insists that its experience to date has already proved that ethical investment can give a good return: four of its existing six funds are in the top 25% of performers and two of them are in the top 10%.

Company analyst Toby Belsom insists that even if no investment products are sold on the back of the new indexes, they will serve the purpose of boosting the profile of ethical investment.

“Ethical issues are not going to disappear. If anything, they will become bigger,” he adds.

NPI, which employs its own team of researchers to vet companies, believes that it punches far above its investing weight in the positive publicity it achieves for the ‘good guys’.

Although European institutional involvement is non-existent, many European Commission officials believe that any moves to push investors away from arms, tobacco and animal testing and into new environmental and energy technology could fill some of the gaps arising from the EU’s more hands-off approach to policy-making and financial regulation.

Nowhere is the Commission trend towards encouraging, rather than forcing companies to move in the right direction, clearer than in the environmental field.

Here, a mixture of eco-labels, information about energy use on cars and fridges, and voluntary agreements is one of the biggest innovations of Ritt Bjerregaard’s term as Environment Commissioner.

Scandinavian company Tomra, which specialises in machinery for recycling aluminium cans, is a front runner in the race to join NPI’s European index.

However, NPI’s approach goes further than targeting obvious green companies. It also seeks to support ‘class leaders’ in other sectors.

Under this heading, UK bank NatWest finds a place in the NPI portfolio for its support for small businesses, willingness to back innovative companies and management structure.

Ethical investment through unit trusts and other tools has grown from nothing around a decade ago to account for nearly 3 billion ecu of investment in the UK. “Mainstream companies such as Standard Life and Sun Life have now started ethical funds,” says Belsom.

Similar schemes exist in Sweden, Norway and Germany, but these are still comparatively small compared with the overall capitalisation of markets.

Pension funds are also turning to specialised companies which screen portfolios so that businesses with dubious investment records can be avoided and voting blocs aligned to change corporate behaviour.

Anglo-Dutch oil company Shell’s promise last year to be more accountable in its environmental and humanitarian policies was a result of behind-the-scenes manoeuvring to rally pension fund votes, according to the London-based Pensions and Investment Research Consultants.

In addition to the pressure from ethical investors, some of the soul-searching among European firms arises from the explosion in world trade over the last decade, which has pitched businesses into new, unfamiliar corners of the world and, sometimes, uncomfortable choices.

Global information networks which carry highly damaging stories across continents in seconds have also played a part. Making the wrong choice can be very expensive if it tarnishes a company’s image and turns customers away from its products.

The consumer boycott of French products in the wake of the government’s hugely controversial nuclear tests in the Pacific, and the shunning of Shell following the Brent Spar episode, showed how damaging public hostility can be.

Another factor is the growing importance of a ‘good’ company image to sell products. “Companies are increasingly using ethical values in their advertising to sell goods,” explains Jens Bethelsen, head of marketing policy at the Confederation of Danish Industries.

The Danish confederation encourages its members to follow human rights and environmental guidelines in their dealings with underdeveloped countries, and many company executives take up its invitation to talk to human rights organisations about problems in specific countries.

“A lot of companies tell me they do talk to the centre for human rights and Amnesty International,” says Bethelsen, who adds that while the Nordic countries are leading the way in pushing ethical issues, others are catching up as firms introduce EU-wide rules.

The limits of the moral high ground have, however, already been prescribed above boardroom and trading floor level. Here, one person’s ethical stand is another’s trade barrier or discrimination.

The state of Massachusetts’ laws penalising companies which sign big contracts with Burma – now self-styled as Myanmar – by putting them on a blacklist has already led to a high-level trade clash between the EU and US, with the former threatening action in the World Trade Organisation.

Other US states such as New York and Vermont are looking at similar measures, sparking worries in Brussels that more states, county towns and federal institutions will follow this lead.

In the EU, Denmark has taken a moral lead by repeatedly raising the issue of China’s repression of the democracy movement and refusing to establish normal relations long after its EU partners had done so.

The price paid by Danish companies was to be sidelined by one of the world’s biggest markets. Their representatives were still greeted with polite smiles, but they found that the rules for doing business had subtly changed.

“The Chinese did not halt investment or hurt sales of private companies. They could not do that. However, Danish companies found they were no longer on the short list for government contracts. Soft loans from Danish banks were no longer recognised,” explains a spokesman for the Confederation of Danish Industries.

It estimates local businesses, mostly environmental and energy firms, lost contracts worth between 75 million ecu and 150 million ecu because of the new Chinese investment wall.